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Divided FCC Approves Rules for Incentive Auctions; Appeal by Broadcasters Possible

Friday, May 16, 2014

By Paul Barbagallo  

On a 3-2 party-line vote, the Federal Communications Commission approved an extensive and complex set of rules that will govern agency's first-ever incentive auctions of spectrum.

At stake in the incentive auctions is as much as 84 megahertz of 600 MHz low-band spectrum, which the FCC will try to reclaim from television broadcasters and then auction off to wireless carriers led by Verizon Wireless and AT&T Inc., with a portion of the proceeds paid to the broadcasters.

“We are creating a marketplace so that the market can decide the highest and best use of spectrum,” FCC Chairman Tom Wheeler said in a brief statement preceding the commissioners' votes. “It has never been tried before; it's incredibly complex.”

The action came at the commission's May open meeting, where the agency also voted to issue a notice of proposed rulemaking on net neutrality as well as adopted rules concerning spectrum aggregation and the licensing and use of wireless microphones (see related stories in this section).

Few Surprises in Final Order

As has long been expected, the rules set forth a “Down From Channel 51” band plan with specific paired uplink and downlink bands made up of 5-MHz “building blocks.” To protect licensed services from harmful interference, the band also will include an 11 MHz duplex gap.

The rules will further accommodate “variation” in the amount of spectrum that the FCC can recover from TV broadcasters in different geographic areas. This will prevent what the agency has described as “least common denominator markets” for reclaimed spectrum across the country.

As for licensing areas, the rules adopt Partial Economic Areas (PEAs) to permit entry by wireless carriers that want to offer services on a localized basis, yet at the same time allow providers that plan to provide services on a larger geographic scale to aggregate PEAs.

The technical service rules for the 600 MHz band will be similar to those governing the adjacent 700 MHz band, and all future 600 MHz-band devices must interoperate with each other.

Unlicensed uses, such as Wi-Fi and Bluetooth, will be permitted in “guard bands,” Channel 37, and the duplex gap, though technical rules will be set at a later date, FCC staff said.

Flouting Congressional Intent?

The FCC's vote culminates more than a year-and-a-half of public comments, workshops, and high-level meetings with industry stakeholders aimed at forging consensus around myriad thorny issues.

In the end, Republican FCC Commissioners Ajit Pai and Michael O'Rielly each cast dissenting votes, criticizing the rules as overly complicated, unfair to TV broadcasters, and potentially in violation of the Middle Class Tax Relief and Job Creation Act of 2012 (Pub. L. No. 112-96), which authorized the FCC to hold incentive auctions.

Pai took issue in particular with the FCC's decision to use new software, TVStudy, to implement Office of Engineering and Technology Bulletin No. 69, the Longley-Rice Methodology for Evaluating TV Coverage and Interference.

The Middle Class Tax Act directed the agency to use Office of Engineering and Technology Bulletin No. 69 to “make all reasonable efforts to preserve, as of the date of the enactment of this Act [Feb. 22, 2012], the coverage area and population served of each broadcast television licensee.” The FCC believes the current software is out of date, but the National Association of Broadcasters claims TVStudy fundamentally alters the methodology of OET-69, noting that Congress had written the law with “key features” of the software in mind.

Most importantly, the software will determine the coverage areas and viewer populations that the agency will seek to preserve for any TV stations affected by the auction repacking process.

“For the most part, [the FCC's] departures from the OET-69 methodology appear to be changes for the better,” Pai said. “I fear, however, that they will be all for naught if a court postpones or invalidates the incentive auction having found those changes are unlawful.”

Turning to another issue, Pai said the FCC should have set $1.75 billion as the budget for repacking TV stations to insure stations are held harmless. Along those lines, the commission also should not have imposed a value on particular stations in the reverse auction.

O'Rielly further disagreed with the FCC's “final stage rule,” which determines whether the auction can close.

As laid out in the final rules, the auction will end once enough revenue is raised to cover the payout to the participating stations, the commission's administrative expenses, the $1.75 billion repacking budget for the remaining broadcasters, and any remaining amount that is needed to pay for the First Responders Network Authority.

“While I strongly support meeting the statutory funding target for FirstNet, I do not believe the commission has the right to pick and choose which of the congressional funding priorities it is going to favor,” O'Rielly said. “The simple fact is Congress has already allocated the funding expected from a successful incentive auction for many purposes. Accordingly, the ‘final stage rule’ should continue the auction until it has raised as much revenue as it can beyond the payments to effectuate the reallocation of broadcast spectrum to wireless broadband use—with the remaining revenues going to the list of Congress' priorities. Or it should incorporate all of the items, including deficit reduction, into the final stage rule. Choosing just one program for guaranteed funding smacks of politics and tarnishes the agency's credibility.”

O'Rielly lastly questioned whether the rules protect broadcasters who ultimately choose not to participate.

“The item seems to skid across the line in a couple of instances and I expect a court may find difficulty in supporting the commission here, notwithstanding any normal deference given,” O'Rielly said.

Broadcaster Participation Still A Question Mark

The Middle Class Tax Act stipulates that about $15 billion of the $30 billion extension in unemployment benefits will be paid for with the proceeds of incentive auctions, but nothing in the law forces TV broadcasters to relinquish their licensed airwaves. Stations have the option either to contribute their full 6 MHz allocation of spectrum, agree to share the same channel with another broadcaster, or move from UHF to VHF. Nearly $2 billion also will be made available to compensate TV stations that choose not to take part in the auction but are then relocated to other channels.

In the FCC's final rules, the agency elected to adopt a descending clock format for the reverse side of the auction.

But to date, no major broadcaster has publicly agreed to relinquish their 6 MHz allocation.

AT&T Inc., which had initially threatened to sit out the auction over concerns about bidding restrictions, said in a statement that the FCC's threshold price of $1.50 per MHz/POP will “attract significant broadcaster interest,” so that an initial clearing target of 70 MHz or more is very likely.

Democratic FCC Commissioner Jessica Rosenworcel, while crediting FCC staff for striking a balance between so many competing interests, said the agency must now focus intently on reaching out to broadcasters to urge them to participate.

“I have spoken with many broadcasters—large and small—about what the commission can do to help them make a decision about how to proceed,” Rosenworcel said. “Every meeting yields the same refrain: ‘We need a number.’ This does not need to be difficult or resource-intensive. But until the agency can provide broadcasters with a better sense of what price their spectrum might yield, including the tax consequences, broadcasters do not have the tools to make smart and dispassionate decisions about whether or not to participate. This is not just a matter of fundamental fairness; this is a threshold matter that could very well determine whether or not these auctions achieve their lofty goals.”

In her statement, Rosenworcel cited the results of a recent test by two TV stations in Los Angeles—KCLS and KJLA—showing that it is possible for broadcasters to share the same radio-frequency channel without degrading signal quality and ultimately harming viewer experience.

She said that while the test has proved helpful to the FCC, questions still linger about the legal and business aspects of channel-sharing.

“How do you address property ownership issues between commercial and non-commercial broadcasters? Should we consider developing some ‘off the rack’ templates that assist with putting these sharing arrangements in place?” Rosenworcel said. “I am concerned that without this kind of groundwork, we risk broadcasters sitting this opportunity out.”

NAB Statement Suggests Appeal May be Coming

Not surprisingly, the National Association of Broadcasters, which has been advocating for TV stations that do not wish to participate in the FCC's incentive auctions, issued a strongly worded statement of opposition to the agency's vote.

Dennis Wharton, executive vice president of communications for the National Association of Broadcasters, said the FCC disregarded Congress by adopting new coverage and interference software “that has not yet worked, potentially jeopardizing hundreds of TV stations and millions of over-the-air television.”

“It takes for granted that the yet-to-be-released auction and repacking software will work flawlessly,” he added. “The FCC cavalierly concluded that broadcasters forced into a shrunken TV band won't be guaranteed full compensation for this disruptive move - as was the express intent of Congress.”

The statement suggests an appeal by broadcasters may be forthcoming.

Asked about whether the FCC was prepared for such a possibility, FCC Chairman Tom Wheeler expressed confidence that the auctions, which are slated for mid-2015, will go on regardless.

“Almost every auction the commission has ever held has had some kind of appeal,” he said, “and the auctions have gone forward.”

The text of the FCC's rules was not available late May 15.

To contact the reporter on this story: Paul Barbagallo in Washington at pbarbagallo@bna.com

To contact the editor responsible for this story: Bob Emeritz at bemeritz@bna.com

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